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We first situate the proposal.
While all businesses have been affected by the pandemic and its associated lockdowns, certain activities have clearly suffered more than others and must contend with a longer period of recovery — if they ever do. Groceries and other markets for fresh and processed food were among the least affected and functioned at some level even under the strictest quarantine. Manufacturing and construction were given the go-signal owing to their value-added and employment contributions. Even public transport is now gradually being restored (jeepneys being the bellwether of semi-normalcy) and smaller retail and dine-in establishments and even personal services requiring proximity such as hair salons have been allowed to function, albeit at much-attenuated levels.
I am pleased to share with readers recent posts to GlobalSource Partners subscribers (globalsourcepartners.com) written by Christine Tang and me on the recent BSP cut in policy rates and on our concerns on public transportation and the T3 ( test, trace, and treat ) program.
Before the Asian Financial Crisis in July 1997, a group of economists which included Dr. Raul Fabella of the UP School of Economics (now a National Scientist), the late former Socio-Economic Planning Secretary Dr. Cayetano “Dondon” Paderanga Jr., former UP Professor and presently Bangko Sentral Governor Ben Diokno, and myself, were calling for a pre-emptive devaluation of the peso.
A curious mix of relief and trepidation (plus exasperation over the lack of transport) has attended the dialing down of Metro Manila’s lockdown from “modified enhanced” to now only a “general” community quarantine. While most people are obviously pleased with the chance to return to work, a feeling of unease still hovers over them owing to the health risks they must face in their simple desire to earn a living.
Create means making something out of nothing. CREATE (Corporate Recovery and Tax Incentives for Enterprises) is a new Department of Finance/National Economic and Development Authority initiative announced in the 14th of May Sulong Pilipinas e-Conference with stimulus in mind. It will replace CITIRA (Corporate Income Tax and Incentives Reform Act). Will CREATE make something out of nothing? Or will it make nothing out of something? Would that it be the former. CREATE’s most salient provision reduces in an instant the corporate income tax (CIT from) 30% to 25% instead of gradually as in CITIRA. This move will punch a huge hole on government tax collection (P625 billion in five years and P42 billion this year by government estimates). The authorities hail this as the “largest stimulus program for enterprises” to speed up recovery from the COVID-19 free-fall. The finance department argues that a massive multiplier effect will follow to recover the loss.
It is disquieting to read a news report about Senate President Tito Sotto promising to fast track the passage of CITIRA (Corporate Income Tax and Incentive Reform Act) by the Senate, justifying it as an urgent measure needed to stimulate the economy. All agree that the economy needs to recover as fast as it can. It was already reported in the first quarter of this year that on a year-to-year basis, the GDP contracted by 0.2%.
After revising its GDP growth target to a more realistic -2 to -3.4%, the government is now crafting its economic recovery program in consultation with private sector stakeholders. I have been asked to provide feedback on the draft Philippine Program for Recovery with Equity and Solidarity (PH-PROGRESO), presented by Planning Secretary Karl Kendrick Chua in a virtual meeting with Manila’s top financial executives (FINEX). Below I share with readers my brief commentary.
The current pandemic has tested the resilience of almost all the country’s institutions -- and found them wanting. Not least affected has been the country’s education system. The prolonged suspension of classes, the abrupt ending of instruction, and the schools’ make-do closures of the school year effectively stopped learning dead in its tracks. While interrupted education may seem a side issue in the face of the more existential threats to life and livelihood, its long-term consequences for the nation’s future cannot be ignored.
As of the fourth week of April 2020, most countries, the Philippines included, are preoccupied with crafting a phased exit from mandated lockdown. The consensus seems to be that a prolonged induced coma can precipitate an economic collapse leading to a tsunami of fatalities only remotely connected to COVID-19. Already, food banks are running low and protests against the lockdown are growing in some states of the USA. Most countries that is, except Sweden and Taiwan.
First off, there’s a difference between economic relief and economic recovery. Economic relief refers to the assistance government must extend to workers and businesses because it ordered them to stop due to the public health emergency. Economic relief is both a humanitarian response -- help people who suffered through no fault of their own -- and an economic one -- to prevent consumer demand from cratering. Economic relief is immediate and urgent. Economic relief also includes the managed transition from a total lockdown to a new normal balancing the needs of public health and the economy.
The World Bank in its economic update of the East Asia and the Pacific dated April 2020 has COVID-19 as its theme. The update bears disappointing facts regarding significant slowing down of several growth drivers. While under a normal situation, global and national economic managers can take corrective actions to boost performance, the problem is we live in extraordinary times because of the COVID-19 pandemic. Given the unavoidable economic cost of containing COVID-19 and saving lives, the world may likely expect another type of a pandemic -- a global economic recession.
The enhanced community quarantine (ECQ) in Luzon, although necessary to contain the spread of COVID-19, has resulted in the grave vulnerability to hunger and poverty of households reliant on non-regular forms of employment and with no savings and little or no access to social protection. Programs intending to alleviate the impact of the ECQ should target them first.
I am pleased to share with readers a post Christine Tang and I wrote for GlobalSource Partners (globalsourcepartners.com ) on March 18 on the potential economic growth impact of COVID-19 and on March 19 on the recent actions government has taken in the monetary and fiscal policy areas.
On Thursday night, President Rodrigo Duterte, upon the recommendation of health officials, announced that for 30 days starting March 15, Metro Manila will be put under “community quarantine,” a term that he said means a lockdown. The measure was in response to the rapidly rising number of COVID-19 infections in the last 10 days, increasing from only three (with one dead) to 140 (with 12 deceased) per the latest count (as of March 15).
Days before the spike of local cases of infection with the SARS-COV-2 coronavirus which causes COVID-19, the Senate Ways and Means Committee was ready to approve its version of CITIRA (the Corporate Income Tax and Incentives Rationalization Act). The proposed law is the second phase of tax reform of the government, which reduces the corporate tax rate and reforms the investment incentives laws of the country.
Since our quarterly outlook issued a little over two weeks ago, the Philippines reported three new cases of the COVID-19 disease in addition to the three cases detected at the time of our report (with one death). In the meantime, travel ban for inbound travelers from certain regions of South Korea has been imposed, alongside that for China and its administrative regions. With the virus spreading rapidly in different continents, the fear is that the virus is spreading undetected within the country. Analysts in the meantime have started to increase their estimates of the adverse impact of the COVID-19 on local growth with some shaving 0.3 percentage points (ppt) off their original forecasts.
We live, it seems, in particularly trying times of multiple and simultaneous “acts of God.” No sooner had the Angat Dam water level gone dangerously low causing water interruptions than the African Swine Fever decimated our hogs, the Taal volcano erupted, and the coronavirus pandemic exploded disrupting lives, livelihoods, and property. Acts of God happen but we can’t say exactly when and where. And when they come calling, they wantonly lay waste to everything along the way. As a society, we are forced to take draconian measures (lockdowns, evacuations, livestock culling) and to hope we can wait out their ravages. In those times, we draw upon the reserves we built in calmer times. These reserves serve as the ramparts that stand between us and extinction. Our “resilience” is, in other words, anchored on those fateful reserves.
One of the bright spots of the economy under Duterte is said to be the rise in the investment ratio. In the last three years (2017-2019), the average proportion of investment to GDP approached 30%. Compare this with the previous six-year period (2011-2016) when the same ratio averaged 22%.
About two weeks ago, President Rodrigo R. Duterte, in an interview with Ted Failon from ABS-CBN, said that he will sign an executive order imposing a limit on the prices of certain medicines. “That’s good for the Filipino, reduced prices or maintaining a price. I will even sign the document twice over,” the President said.
It’s becoming ever more clear that our dysfunctional, weak, inefficient, and corrupt bureaucracy is a binding constraint to growth and development. It belongs up there together with our low agricultural productivity, labor rigidities, and monopolies in strategic industries as major constraints for the country to attain its true growth potential.
Time was when the Philippines held the dubious distinction of being a “Latin American country in the East.” Its growth episodes were short and spasmodic; “boom and bust” aptly describes its longer horizon; investment was at a canter; its till was perennially made empty by waste and venality; and government encroached into the market mindlessly. That was also Latin America Post-WWII. The current development tragedy, Venezuela, is the latest and most virulent example of the Latin American disease presided over most times by populist caudillos who supplanted the imperfect market with their own populist-socialist mishmash.
A new year is typically the time to turn a new leaf -- but maybe not before past accounts have been settled. While the administration has earned plaudits from some quarters for the economy’s performance under its watch (which, to be honest, could have been better), nagging questions continue regarding the social, civil, and human cost accompanying that success. Was it a vital component, even “a necessary evil” in the words of one economic manager? Or was it a purely incidental and gratuitous -- and lethal -- diversion? In other words, would the economy and society have prospered anyway without a mounting pile of bodies (more than 7,000 drug suspects to date)?
The President unleashed a torrent of expletives on the two Metro Manila water concessionaires for supposedly “onerous” contracts. I tried to understand why. After all, this major privatization, undertaken in 1997 during the Ramos administration to respond to a water crisis, was a celebrated case of a working public private partnership and was awarded multiple times for the transparency and design of the bid process and for its success in addressing the core problem of poor water services provision, especially its inclusive business model of connecting millions of poor communities. The concession agreements were subsequently extended during the Arroyo term in recognition of this success and in order to enable more investments in water and sewerage services to be done, pursuant to the Clean Water Act.
We are ending the last quarter of the year, which is our main harvest season and when palay prices are seasonally at their lowest. Farm prices had fallen at an unprecedented rate since the 1970s during this quarter. Surely, the combined effects of the harvest season and rice import liberalization have caused the decline of palay prices and farm incomes. Have they bottomed out, or are they still falling even now in the major rice producing areas?
On Nov. 7, during the Atlas Network’s Freedom Dinner at the Intrepid Sea, Air, and Space Museum in New York City, the Foundation for Economic Freedom, of which I’m President and co-Founder, received the prestigious Templeton Freedom Award. The Award was given in recognition of the Foundation’s work advocating and successfully pushing for legislation removing Commonwealth-era restrictions on agricultural patents, thereby immediately benefiting 2.5 million farmers and energizing the rural land market.
There is no question that the Philippines needs a boost to its dismal investment rate (22-24% of GDP while our neighbors are punching at 25-35%). But the question is how? The government’s Corporate Income Tax and Incentive Rationalization Act (CITIRA) claims that a lower statutory corporate income tax has to be part of the mix! The subsequent strident debate on CITIRA mostly centers on how the replacement of gross income tax (GIT) at 5% with a corporate income tax (CIT) will impact locators and foreign investment in PEZA, the source of most of our manufactured exports. But truth to tell, this replacement issue, as important as it is, is a derivative one. While overstaying incentives are a legitimate issue, the major prior reason for the restructuring of PEZA incentives -- including the replacement of gross with corporate income tax for locators -- is to plug the potential fiscal hole punched by the proposed lowering of the statutory corporate income tax (CIT) rate from 30% to 20%. The crucial claim is that lower statutory CIT will boost investment and growth -- a claim, mind you, that is by contrast largely glossed over. Surely, the Department of Finance (DoF) team must have this issue well-covered. But merely pointing to the lower average CIT in our Asian neighborhood (average 20% today), where the investment rate today is higher, is no proof that higher investment rate will result in the Philippines. In 1980s when they were making their move, Malaysia’s and Singapore’s CIT was at 40% while Indonesia’s was at 35%. Nor does it suffice to point to Sweden’s and Denmark’s corporate income tax at 22% in 2019, since Sweden’s was at 60% in 1989 and Denmark’s was at 50% in 1985. A cursory check of the evidence seemed in order if only to confirm the claim.
Most of the analysis done on the impact of the rice tariffication law make use of fairly recent data, as in what happened to rice imports, palay and rice prices in 2019. It may be useful to look slightly farther back, say in the last 10 to 15 years. Had the changes observed this year been unprecedented? If they had occurred before, the chances of our rice farmers, millers, and traders surviving what would seem now to be extremely adverse situation for the industry are high.
Most affluent western societies consider themselves “open societies.” Open societies swear by the values of inclusion in diversity. They shun apartheid or unequal access to social benefits based on race, color, or religion. A central tenet is the celebration of the individual over the group and of the ruled over the ruler embodied in one-man-one-vote. Open borders celebrate the fundamental right of its citizens to opt out or opt in. In the roaring 21st century, most opt in. The most envied of open societies because they are affluent and happiest by many measures, are the Scandinavian countries. Have they found the formula to render the baser human instincts recessive? Have they found the philosopher’s stone on the sustainable marriage of openness and affluence?
Felix Mendelssohn invented the genre Songs Without Words (Lieder ohne Worte), short instrumental pieces that were almost singable but contained no lyrics. Mendelssohn objected to a friend’s attempt to “put words” to them, since for him the meaning of the pieces was already crystal clear. He was right. In fact, a good deal of the power of classical music is that -- like abstract paintings -- the listener is left free to impute her own meaning to the piece.
Congratulations are due to House Speaker Alan Peter Cayetano and Ways and Means Chair Joey Salceda on the swift passage of the Corporate Income Tax and Incentive Rationalization Act and Passive Income and Financial Intermediary Taxation Act in the House of Representatives. Memorably tagged CITIRA and PIFITA by Congresman Joey, it is now being heard in the Senate Ways and Means Committee which is most ably chaired by lawyer and economist Senator Pia Cayetano.
Public support is shifting from rice consumers in 2018 to rice farmers this year. Last year, the country’s inflation rate breached Central Bank’s upper band. Analysts blamed that on rice price inflation, which carries among the largest weight in the consumer’s price index.
Every summer, when the sun is beating down hard on the archipelago and dam water levels are low, a familiar visitor comes a-calling in the islands. Its name: Red Alert. It comes mostly in mid-afternoons and early evenings. Its message: be forearmed for a power outage is nigh. And when in some areas the warning blows real, economic activity slows down or stops altogether. With some untimely equipment failures, brownouts envelope more areas and a power crisis is declared, followed by the familiar howl and congressional hearings.
The recent alarm over falling rice prices after import-quotas were replaced by tariffs points up a larger problem that will increasingly confront Philippine society -- the conflict between the interests of a growing middle class and poorer minorities. On the one hand, the historic measure produced its intended effect: it has lowered rice prices, bringing relief to the large, mostly urban rice-consuming public. (After the avoidable fiasco of 2018, inflation is now a record low of 1.7%.) On the other hand, the same measure has wreaked havoc on the livelihood of rice farmers and landless farm workers, who count as some of the poorest Filipinos. To be sure, the government purports to ameliorate the damage. But the one-time loan it offers to rice farmers is obviously not enough to facilitate the permanent shift -- in crops, technologies, mindsets, and occupations -- that the new trade-regime imposes.
So how do we get from our estimate of 6% to government’s 7-8% growth target? I would describe 7-8% as aspirational, considering especially the current global trade environment that has dampened export growth. Although we said Build, Build, Build will add to domestic demand growth, there is high import leakage (40-60% per IMF). An example is cement where imports have grown by a Compound annual growth rate (CAGR) of 30% in the last three years. Also, as we said, all the building activity will aggravate strains on traffic, logistics, and power supply, not to mention that manufacturing plants have been operating at over 80% capacity for some time now.
ON July 23, my colleague Christine Tang and I were asked by GlobalSource Partners New York* to do a teleconference call with our international subscribers on the topic in the headline. I am pleased to share with readers the transcript of that call. Apologies, this will have to be in two parts. The second installment will be on the risks to this cautiously optimistic scenario, and some political analysis -- what the President will likely do with his abundant political capital and the odds of policy continuity post 2022.
Manila Mayor Isko Moreno has been rightly hailed for reclaiming public space by removing illegal vendors plying their trade by occupying streets and sidewalks. However, some critics have pointed out that these vendors are merely trying to earn a living and would suffer tremendously if they were removed or relocated.
Calls for the review of the rice tariffication law at this point are premature as it has been less than a year since it started being implemented. Farmers have yet to receive the assistance which the rice competitiveness enhancement fund (RCEF) offers. Agriculture secretary William D. Dar had just assumed his post, pledging to implement the law effectively. I don’t see any evidence at this point that the lawmakers of the 17th Congress made a big mistake passing this law.